Please forward this letter to your congressman

Please forward this to your local political representative and to all your friends and politically involved people. You can change the name... I am upset about this and figure this is a start. Please keep this bumped too...

To My Local Representative,

The recent proposal seeking $700 billion of public money to purchase bad housing debt is a bad idea for many reasons I can easily think of: it undermines capitalistic ideals, it artificially attempts to set a price of the housing market, it acts as a wealth transfer from the taxpayer to the banking system... The list goes on. My idea will entirely avoid the issue of moral hazard, which is the most obvious and worthwhile, and instead deal with the pragmatic on why this bailout will fail, and housing prices will continue to fall and force even more bank failures, if executed as proposed.

Let me propose in simplistic terms why you as a policymaker should reject this measure as if all of the above mentioned ideas are not good enough reason: Adding $700 billion of debt to the U.S. balance sheet will require a massive selling of treasuries to finance this. It will force the free market to set long term interest rates upwards, thus forcing down the fundamental value of homes. Even discounting the potentially economically devastating inflationary and dollar devaluing impact of this action (and the implied action of future housing debt purchases by the U.S. government), higher long term interest rates are inevitable from this action. We will become even more dependant on foreign dollar holders to finance our fiscal irresponsibility, exacerbating an already strained political position with our trade partners. Even with a bailed-out of Fannie Mae and Freddie Mac ideally resulting in lower risk spreads over treasuries, we will see the bid fall for U.S. government debt completely offset any proposed benefit of these actions.

In finance, the risk free rate is determined by the yield on U.S. government debt of any maturity, since the holder is guaranteed to recover all of his principal back at maturity, plus the yield he collects. As the risk free rate goes up, the value of all assets that possess risk - houses, stocks, bonds - fundamentally falls. These asset prices only will recover as risk free rates fall once again. This is why we saw stocks look so cheap in the early 1980s, as risk free interest rates across the spectrum headed towards 15-20%. High interest rates will make it very difficult for businesses to raise capital to grow and operate, and less capital will be available to pay proper wages or hire additional workers.

Fundamental analysis suggests that rents are simply too low right now compared to housing prices in the most inflated markets, with most of California being a great example. To give a real estate investor a suitable return over risk free money (treasury yields) in areas not already in foreclosure crisis, houses must fall nearly 50% from today's September, 2008 prices! This considers the input of a risk free rate around 4-4.5% for long dated treasuries

If the government chooses to subsidize bank balance sheets now by buying their debt tied to distressed housing assets so early into the downturn of the housing cycle, we will be put in a precarious situation of having to possibly repeat this effort with another several trillion dollars we do not have. Again, this will force interest rates even higher. This is a negative feedback loop you the policymaker will essentially commit to by approving the Bush administration's proposal.

Too little money out there to buy the debt we need to sell to support our banks points to very high interest rates as the net result, thus destroying volume of lending activity, making it difficult for businesses and individuals to borrow money. The worst case: a lack of investment for businesses that create things and commodities we need and use everyday. This points to decreased supply into the economy, and will serve to be very inflationary on all counts.

We should be more concerned with making the balance sheet of the U.S. government sustainable and redirect any desire to support the economy into efforts that promote actual investment and resolution of our supply problems. As an alternative, I suggest you imagine what would happen to our trade deficits, bloated by oil product importation, if we spent that same $700 Billion to subsidize hybrid electric-gasoline and hybrid electric-natural gas cars for all of our population! It excites me to think how investment money would come into the United States as our currency strengthens merely due to massively decreased trade deficits, setting an example for all nations to follow. Those increased investment inflows would help bid our existing treasury debt and keep interest rates low where they are today.

These continued bailouts are unnecessary, and the free market needs to function as a free market. If you as a policymaker have any fear to the repercussions of not supporting overlevered and irresponsibly operated institutions, I suggest you push for policy designed to reward properly managed ones and create programs to stimulate prudent investment and credit creation by government backed money. I think the American citizenry would rather see a properly regulated $700 billion business investment program be floated, where small business owners with approved and substantially valid business ideas receive loans below market rate. This injection of investment capital, rather than speculation capital, is a prudent step in the right direction.

If as a policymaker you are concerned with the inevitable destruction of available credit that comes with periods of bank insolvency, I suggest you do not forget you have the power to create credit and terms of credit. With that power however comes a great responsibility, since each time you do it dilutes the value of the currency we all hold. Buying housing with money we do not have today, which the Bush administration proposes we do, is essentially the same as buying tech stocks at the peak, since the fundamental value of a home is arbitrarily defined as a function of the price of treasuries and the health of our wage market, and is far below many local markets' present price. Do you want to be the one responsible for wasting those dollars on assets that have expensive prices even in today's terms rather than invest in our collective future?

The housing market will find its own fundamental value, and genuinely prudent instutitions will still be around, as they have made themselves invulnerable to the run presently happening. There may be few in the end, but your responsibility is one that requires you remember the examples of Zimbabwe and 1923 Weimar republic hyperinflation - we do not have unlimited opportunities to make this right without a great cost.

You are wrong about some of your assumptions. First, $700B is just the tip of the iceberg. What about $1T next, etc

There are plenty of banks that WON'T have a run on their deposits ... This will be darwinistic.

The govt should save its ammo for cleanup after these losses are taken ... not start arbitrarily buying an overpriced housing market now.

That is my point. If they do this now, we'll quickly pay a much larger price.

More...

The US already spent 800 Billions on the war. Bring the troop home, we can afford another 1 trillion on banking system. Surely ...700 billions is the tip of the iceberg but this debt & spending MUST BE DONE, period.
the US will have more debt, but it's GOOD debt because it spends here at home & to save the financial system, not spending for some strangers in some other countries. Iraq war not only causes BAD debt & STUPID debt, spending for NON-americans, but how about human lives? Can we put a price on that? How much does that war really cost? THINK ABOUT IT!!!!